Jan 15, 2014
Martin Crutsinger, The Associated Press

WASHINGTON – The head of the International Monetary Fund warned policymakers on Wednesday to avoid mistakes that could derail a fragile global recovery.

IMF Managing Director Christine Lagarde said that Congress should promptly increase the U.S. government’s borrowing limit and the Federal Reserve should avoid withdrawing its financial support too rapidly.

Lagarde noted that the world economy is still feeling the impact of the Great Recession and 2008 financial crisis.

“The crisis still lingers. Yet, optimism is in the air,” Lagarde said in a speech at the National Press Club. “The deep freeze is behind and the horizon is brighter.”

Lagarde said that the IMF will update its World Economic Outlook next week and the revision will show slightly stronger growth than the last forecast the IMF made in October.

“Momentum strengthened in the latter half of 2013 and should strengthen further in 2014, largely due to improvements in the advanced economies,” she said.

But Lagarde cautioned that there were still risks. She specifically mentioned the threat of deflation, a period of falling prices that can freeze economic activity. When it happens, consumers and businesses postpone purchases because they are expecting prices to drop further.

She noted that many nations currently had inflation running below the targets set by central banks. A key inflation gauge in the United States shows prices have risen less than 1 per cent in the past year, well below the Fed’s 2 per cent target.

“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” Lagarde said. She called deflation “the ogre that must be fought decisively.”

Lagarde said that Europe is turning the corner from recession. But she described that recovery as uneven. Some European nations are still burdened by high debt and credit restraints. She said the European Central Bank could do more to help the recovery by providing targeted lending.

For big emerging economies such as China, Lagarde said financial regulation needed to be strengthened and officials will need to be alert for any threats such as asset bubbles.

“Now that the global economy looks more stable, the big priority for policymakers in 2014 is to fortify the feeble global recovery,” she said.

The Obama administration failed this week to win support from congressional negotiators to include an increase in U.S. support for the IMF in a $1.01 trillion spending bill.

Without the U.S. support, the 188-nation lending agency cannot implement a plan adopted in 2010 to double its resources for lending to troubled countries. The plan would also increase the voting power of emerging-market countries, such as China, Brazil and India, while reducing the voting strength of some Western European nations.

Asked about the failure to win congressional approval for the IMF budget increase, Lagarde said she remained hopeful that the administration will eventually succeed in getting the measure passed by Congress. She said that an IMF with greater resources for lending would be better able to help countries in financial crisis and that would be in the best interests of the United States.